Homework Answers
The increase in government spending increases expenditure in the economy. hence people demand more money for the transaction. This increases the demand for money in the economy. The increase in money demand given the supply increases the rate of interest. The rise in interest makes the economy a profitable place for investment. Then, the capital started the flow in the economy. Now the foreigners need more domestic currency to invest in domestic bonds. This increases the demand for domestic currency and domestic currency appreciates. the appreciation makes export expensive and imports dearer. Thus, the export fall and import rises. This, in turn, decreases net export. The rise in interest decreases investment expenditure and the rise in the exchange rate decreases net export. hence, the rise in government spending crowds out investment and net export. As a result, the aggregate demand stays the same.
Therefore, the right order must be
- .........increased demand for money..........
- ....increased demand for domestic currency......
- .....due to the appreciation of the domestic currency.
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